The Rise of Vendor Relationship Management

Our world is being turned upside down by the Big Shift. Customer Relationship Management (CRM) emerged in part to cope with the growing power of customers, but Vendor Relationship Management (VRM) flips this equation and anticipates that customers will increasingly take the lead in managing their vendors.

We've long known that customers are gaining power in markets around the world as they tap into the twin forces of digital technology and economic liberalization. They are able to access more and more information about products and vendors and to more readily switch from one vendor to another in a world of expanding choice. This has become a truism, so much so that our eyes begin to glaze over when we hear it, yet few of us have thought through the profound implications that this power will have. We’re not just talking about mounting pressure on companies, but also the emergence of what I have called reverse markets.

Most of us think of markets in conventional terms – it is about vendors seeking out customers and persuading them to buy more of their products and services. A reverse market flips this dynamic – it’s about customers seeking out the most relevant vendors and extracting more and more value at lower and lower cost. It’s a fundamentally different mindset. It turns much of what we know about business on its head. Framing it in these terms can create a zero sum view – either vendors win or customers win. As Doc persuasively argues, though, a customer driven market actually generates significant growth in demand that will serve both vendors and customers well.

Customer Captivity

Doc lays out the basic premise of the book as follows:

“. . . rather than guessing what might get the attention of consumers – or what might “drive” them like cattle – vendors will respond to actual intentions of customers. Once customers’ expressions of intent become abundant and clear, the range of economic interplay between supply and demand will widen, and its sum will increase. The result we will call the Intention Economy.”

To achieve the potential of the Intention Economy, Doc is an evangelist for the tools, practices and business models that can support Vendor Relationship Management. Doc came up with the concept of VRM in 2006. It began to gather momentum when he joined Harvard University’s Berkman Center for Internet and Society and launched ProjectVRM. As Doc reports, this initiative was built on two basic theses: “Free customers are more valuable than captive ones” and “Free markets require free customers.”

Many executives still express their goal as “owning the customer.” As Doc reminds us, another word for owning another human being is slavery. A key theme throughout the book and a driving force of ProjectVRM is the notion of customer captivity and continued efforts by companies to restrict customer choice. For Doc, providing us with greater choice among captors is not sufficient:

“Improving slavery does not make people free. We need full emancipation. That’s the only way we’ll get free markets worthy of the name.” Perhaps one way to think about ProjectVRM is as a new Abolitionist movement, bent on providing customers with the tools that will free them once and for all from the efforts of vendors to keep them in bondage.

Of course, this overstates the plight of customers since the Internet and associated technology tools have already gone a long way toward empowering customers in their relationships with vendors. Nevertheless, Doc is right to point out that additional tools will be required for customers to become more effective in managing their relationships with vendors.

Tools for liberation

Rather than relying on a few vendors to develop these tools, Doc has been intent on catalyzing a distributed innovation system that extends well beyond ProjectVRM itself. The few development efforts that ProjectVRM has led itself are all open source to minimize intellectual property barriers and to encourage others to build on the software. This has spawned a truly global movement, extending far beyond the US. There are now dozens of development efforts and hundreds of individuals seeking to provide customers with the tools necessary to make VRM a reality.

As Doc freely admits,

“The VRM tools in development today are still at the hammer and screwdriver stage. But the nail guns and power saws are not far behind, because even primitive VRM tools will prove that free customers are more valuable than captive ones – to themselves, to vendors, and to everybody else.”

Over time, the VRM toolkit will encompass a broad array of functionality. It includes trust frameworks, personal data stores/vaults, tools to help customers define the terms under which they want to deal with vendors and then make choices around payments, including what personal data to pass along with their payments and the terms of use for their personal data, micro-accounting tools that help customers (and their agents) to keep track of what they have done, certified pointer systems to help locate digital assets and associated usage rights.

These tools will be supported and amplified by some broader technology developments on the Internet discussed by Doc. In particular, he points to the importance of the spread of application programming interfaces (APIs) that help to connect applications and provide a foundation for what Phil Windley (one of the key drivers of this movement) calls the Live Web in contrast to the Static Web. These APIs will help to move beyond short-term transactions that define much of the commercial activity on the Internet today into complex cascades of activity that build upon each other to seamlessly deliver more value to participants.

The business and tech press today is inundated with stories about “Big Data” but Doc draws attention to the need to develop tools to manage small data, your own personal data. He observes that

. . . the end result is that the “small data” that’s yours will be more important than the “big data” behind marketing’s guesswork. The two in the long run will dance together. But for now the small data side needs to get its act together. And it will.

In seeking to expand the freedom of the customer, Doc rightly draws attention to contracts of adhesion as a key tool of suppression. Contracts of adhesion are basically standardized contracts that vendors use to set the terms of their transactions with customers on a “take it or leave it basis.” Think of those “terms of services” tucked away on websites, written in incomprehensible legal jargon and presented in tiny font designed to give an intense migraine to anyone who is foolish enough to attempt to read through them. Doc observes that these contracts of adhesion “nail down the submissive party while the dominant party is free to change whatever it wants.” It is “Velcro for the vendor and Super Glue for the customer.”

Doc writes

It’s pointless to challenge these contracts so long as three conditions persist: (1) only one side gets to write the agreements, (2) the agreements need to cover all conceivable possibilities, and (3) the other side’s only choice is to agree or walk away . . .

Doc is optimistic that freedom of contract can be leveraged to challenge these contracts of adhesion as long as tools can be put in the hands of customers to define and enforce their own terms. More generally, Doc is optimistic that generative technologies like the Internet and generic access devices “invite, run on, and support a boundless variety of other standards, technologies, and uses, for both hardware and software.” This technology becomes a highly adaptive form of infrastructure that has the potential to transform markets.

But Doc is right that technology alone cannot accomplish the vision behind the Intention Economy and VRM. We also need innovative new services and business models to harness and amplify the potential of the technology. In this context, it is worth pulling out two big implications of Doc’s vision – the emergence of customer agents and the shrinking of advertising revenue as a fuel to drive advertising supported business models (namely, most of Internet businesses today).

The rise of fourth parties

Doc points out that business today is largely a three party affair. We of course have the vendor and the buyer, but we often have third parties that get involved in a transaction, usually by supporting the supply side of the transaction. As an example, he cites the third party app vendors that populate Apple’s online store.

As we pursue the opportunity for VRM, though, Doc anticipates that there will be growing opportunities for fourth parties, those “whose interests are aligned with those of the customer or user or that act as an agent or fiduciary for the customer or user.” These fourth parties can provide a range of services, including substitutability, service portability, data portability, independence and accountability, in dealing with vendors.

We have early examples of these kinds of fourth parties in other domains, ranging from personal financial advisors to personal shoppers, but so far these fourth parties have generally been a luxury available only to the very affluent. The Internet and a host of VRM tools offer the potential to make these fourth parties more broadly available to customers. While these fourth parties may be paid by customers themselves, Doc suggests that they might also generate revenue from vendors who will now be able to target intentions much more effectively.

I wrote about the potential for these fourth parties over a decade ago in my book "Net Worth: Shaping Markets When Customers Make the Rules," which focused on the opportunity to create infomediaries, essentially customer agents who would help us to collect and manage data about ourselves so that we could maximize the value of that data for ourselves. A lot of entrepreneurs were inspired by the vision and formed companies seeking to become infomediaries.

This early wave of infomediaries failed to gain traction because they misunderstood how to maximize value for the customer. On the one hand, many of them thought that privacy was the big concern and that it was simply a question of limiting access to personal data. In fact, relatively few of us are that concerned about privacy in terms of denying access to information about ourselves. But we do want to ensure that we are getting value in return for the data.

Other entrepreneurs, though, came at this from the perspective of maximizing cash payments to the customers in return for access to their data. Once again, this was misguided – the cash value of our data is actually relatively small, with the further paradox that those who might be motivated by cash for their data had the least valuable data. The affluent individuals who could generate more cash for their data found that it was not enough cash to really motivate them.

The key to unlocking the potential of fourth parties like infomediaries is to understand that the real value locked in our personal data is the ability to significantly strengthen convenience, relevance and discovery in our quest for products and services that are most useful and engaging to us. By having a holistic profile of our own activities, an infomediary can truly become a trusted advisor, helping to suggest new vendors or products and services that we might not even be aware of. Thanks to the efforts of the VRM movement, we are finally developing the technology standards and tools that can make this business opportunity feasible.

Implication for advertising

If we think through the implications of VRM in terms of advertising, the impact could be very disruptive. As Doc points out, advertising “flourishes in the absence of more efficient and direct demand-supply interactions.” As VRM achieves its vision of making the intentions of customers more visible and connecting customers to relevant vendors, the “advertising bubble deflates.”

Doc is quick to add that advertising will certainly not go away, but it will likely play a smaller role in the marketplace. This has significant consequences for any business that is heavily advertising supported, which includes most Internet businesses. While there is still time, it may be useful to start re-thinking advertising supported business models and defining products and services that customers might actually be willing to pay real money to obtain.

Bottom line

Doc is emphatic throughout the book that VRM is still in very early stages of emergence and there is much to be done to make it a reality. Invoking Heisenberg, Doc suggests that “Searls’s corollary for the future is that you can know neither position nor momentum, but that shouldn’t stop you from trying to influence both. Or don’t be the pinball. Be the machine."

In this context, Doc is performing the classic role of a shaper as I've written about in the context of shaping strategies: he's articulating a compelling shaping view, helping to define a viable shaping platform and pursuing a set of acts and assets that demonstrate both conviction and capability to pull this off. Fasten your seat belts; this is going to be a very interesting and disruptive ride.

Comments

This is an excellent review of Doc's book, John. I especially appreciate you pointing out that "tech cannot do this alone." This requires the efforts of many in current roles as well as emerging roles--here I am thinking of innovative customer focused lawyers who lay the important, and heretofore neglected other code (legal code). Not only do we need innovative "people focused" legal minds but they must be moved from the role of isolated development to that of collaborative design and implementation of new models. Collaboration is key and with that will come solutions that provide win/win.